VEON FINANCIAL SERVICES, INC.
A Registered Investment Advisor
14 Woodmere Circle
Middletown, MD 21769
301/371-0540 (F) 301/371-0543
Vol. 17, Issue 2--June 2002
IN LIGHT OF PENDING LEGISLATION
By Joan M. Veon
Background and Introduction
Although I had addressed the proposed Senate solution to fixing the "Enron's and WorldCom's" of the world by shifting the United States to global accounting rules in the delayed March newsletter (issued the first of June), I was only going to discuss the state of the economy in this newsletter. In light of the tumultuous two weeks on Wall Street which caps off market events beginning May 17 through July 19, this newsletter will have to address both.
To summarize what you are about to read, one year ago, I wrote an in-depth newsletter that addressed the state of our economy. After I reviewed eighteen different economic variables, trying to decide if the glass was "half full or empty," I concluded that our economy was so weak that what would be needed to fix it was a war. My bottom line conclusion was the following:
"Using debt, it has been the American consumer who has kept world economies moving. At some point, our economic foundation is going to crumble. When it unravels, the US will take a very hard and serious hit as never before in our financial history. What could save it? A war. War is above all, an economic stimulus. Instead of a regional war, it might be something larger because now the world economy would come to a standstill. Could it be that this idea is not so far from the truth when you consider the massive debt load of not only the United States, but every country in the world?"
Then the unexpected happened: September 11 changed the face of the world. Today, the world is retooling for a different kind of war. A war against a faceless enemy, that could be anyone, and for a war that has no ending.
In December, the economic newsletter concentrated on "Investments in a War Economy." In it, I quoted some economists whom I have a large appreciation for as I felt their outlook on the economy was "right on target." They all recommended gold and silver stocks and bullion.
The March 2002 Economic Newsletter: "The Final Thrust"
The delayed March newsletter specifically discussed the Enron situation and the deliberations of our Congress to transfer oversight from the Securities and Exchange Commission to a private foundation that will switch to global accounting rules. The bill that outlines this new global structure is S2673, written by Senator Paul Sarbanes (D-MD) who is Chairman of the Senate Committee on Banking, Housing and Urban Affairs. Recently in an interview on CSPAN, former Federal Reserve Chairman, Paul Volcker said he had not only encouraged Sarbanes, but had helped him to write the bill. This admission indicates a whole lot about the condition of our Senate.
As explained in the last newsletter, the seriousness of this is seen in the increased and growing control of the Federal Reserveùwhich is a private corporationùover parts of the U.S. economy that they did not have. Their actions to seize the last vestiges of our financial freedom has come in two different strokes and eliminate "the fire walls" which the early 1930's Congress put in place to protect you and I, the investor. The bills to protect the market from future stock-market crashes were the 1933 Glass-Steagall Act, which was repealed in 1999, and the Securities Exchange Act of 1934 that the Sarbanes bill will repeal.
I have written extensively in previous newsletters about the plans to repeal, and then the repeal of the Glass-Steagall Act. In 1933 when the Act was passed, Congress determined that the reason for the 1929 Stock Market Crash was because banks had their fingers in all of the marketùbanking with deposits and investments with bringing stocks and bonds public and then offering them to investors through their offices. As a result, Congress determined banks had too much power to manipulate the entire financial system. The purpose of the Glass-Steagall Act was to separate the functions of the commercial banks (where you make deposits) from investment banks (like Merrill Lynch and Solomon Smith Barney) that bring new stocks and bonds to market.
As a result of tearing down these walls, banks were then able to go back to pre-1933 and buy insurance companies and stock brokerage firms. Because banks can now own stock brokerage and insurance companies, it AUTOMATICALLY EXTENDS THE TENTACLES AND OVERSIGHT OF THE FEDERAL RESERVE INTO THOSE AREAS since they control the banking system. The bill to repeal Glass-Steagall and make this transfer was called, "The Banking Modernization Act".
This newsletter will review the last sixty days in the market, the Sarbanes Bill to "fix" corporate greed and the drop in the stock market. As a result of CSPAN's interview with former Fed Chairman Paul Volcker and in reading various financial newspapers and reports, I reached three conclusions:
- The market will recover as it did in 1998 because it is being manipulated downward for the sole purpose of getting Congress to pass the Sarbanes bill, which transfers the last vestiges of American economic sovereignty to international bankers.
- The market will not recover even though the Sarbanes bill is passed. What this indicates is that the world has determined that the debt binge of Americans cannot go on any longer and that we have no business being the leading industrialized country of the world.
- In light of the economic power of America, the pattern that you have seen in the last 60 days will continue as a result of the firewalls being torn down (the repeal of the 1933 Glass-Steagall Act in 1999 and the demise of the Securities Act of 1934, which will be gone when the Sarbanes bill is passed) because Congress has given up their oversight to powerful international bankers who have the power to manipulate the entire financial industry.
1. The Market Will Recover
I wrote an article for Worldnetdaily.com where I am a consistent feature writer. I comment on both geopolitical and economic issues. I am reprinting my article on the orchestration in the market that I have observed over key changes in American political and economic sovereignty.
The joint "dog and pony" show between Congress and the market that we witnessed this week, I have seen before. The first time I connected the amazing choreography between the two was in 1998. By the end of July, the Dow was at 8934 or down 66 points from it 9000 historic high. During the month of August, the market was besieged with all kinds of surprise headlines that included Yeltsin almost resigning as President in the midst of a crisis in the Russian ruble and bond default. On August 28 and 29, the Dow lost almost 500 points, ending the month at 8051 or down 11.38% or 1,034 points from its July high. The big market loss came on September 1 when the Dow plunged 512.61 points over various global economic woes ending at 7539.
The gloomy headlines continued through October 9, 1998 when another global crisis hit the dollar that dropped 8%. The decline in dollar was the worst one-day drop in 25 years at it sank 20% against the yen. During this time, there was a bill in the House calling for the reform of the International Monetary Fund that contained provisions for a $100B contingency line of credit. While I had heard Bill Clinton, Fed Chairman Alan Greenspan and Treasury Secretary Robert Rubin (literally) harp on the need to give the IMF $18B for a contingency line of credit, I didn't think anything about it until it was announced on October 14 that there was a tentative accord over the contentious IMF contingency line of credit. The market had its first 100-point gain since 9/15. Assured of its passage, on October 16 the Fed cut interest rates ¼ of 1%. The Dow had its best week in history as it soared 330 points to 8299. On October 20, Congress approved $18B for the IMF. The Dow closed the month at 8592, up 15%. After it was all over, I was able to connect the $18B IMF line of credit to the market.
The stakes are much bigger this time. You see in 1913 when the Federal Reserve Act was passed, the monetary system shifted from Congressional oversight to that of an INDEPENDENT corporation. Now 89 years later, they want the final piece of American economic sovereignty. Recently in doing some research, I stumbled upon a bill that was passed in November 1999 called the Gramm-Leach-Bliley Act. In this bill, Congress went back and amended many of our financial and banking laws such as various sections of the Banking Act of 1933, the Bank Holding Company Act of 1956, the Federal Deposit Institutions Act, the Community Reinvestment Act of 1977 and the International Banking Act of 1978 to substitute congressional oversight with that of the Federal Reserve!
What we have seen with Enron, WorldCom and AOL is all part and parcel of the final destruction of the last vestiges of Congressional oversight over our economic system: the passage of Senator Sarbanes bill which calls for a "Public Company Accounting Oversight Board" which will strip the Securities Exchange Commission of much of its power. This Board will be established as a non-profit with NO Congressional accountability! Furthermore it can adopt any accounting rules, which opens the door for global accounting rules as established by the International Accounting Standards Board in London. Every country will eventually establish an independent public company accounting oversight board that is all part and parcel of shifting power from national governments to the international bankers who run the monetary system of the world. Just yesterday, the Canadian parliament passed a bill like the Sarbanes bill.
On Monday, we saw the market drop over 400 points and then recover. Interestingly enough President Bush who had not backed Sarbanes bill made a speech in which he said he would sign any bill once it got out of committee. The dollar has dropped against the euro and yen, reaching parity with the euro. On Tuesday, Fed Chair Greenspan testified before the Senate. Before he could begin, he was heaped praise upon praise about his wonderful leadership by numerous senators, including Senator Gramm from the above bill. It reminded me of the spineless, decadent Roman senators who praised Nero to keep him from being naughty.
I have every faith that same choreography of 1998 is in the process of being repeated. When Congress has passed the Sarbanes bill, the market will rally and everyone will be happy: the Fed because they accomplished more than any revolution could, investors because their accounts look better and Congress because traitors or dogs don't know any better.
President Bush tried to calm investors' fears by predicting that new restrictions on corporate accounting will buoy stock prices. He declared that the accounting bill headed for passage this week in Congress will give investors more confidence by saying, "If they buy stock, they're buying value, as opposed to buying into a bubble" (WP, 7/23/02, 1). He apparently means new money because long-term investor money has taken the current stock market hit and will hopefully recover.
2. The market will not recover even though the Sarbanes bill is passed.
Throughout the first six months of this year, the headlines on more than one occasion touted that the recession was short-lived and that we were in recovery. Let me give you 3 reasons why we are not in recovery: (1) Consumer Debt, (2) Corporate Debt and (3) Federal Debt.
Interestingly enough, I just returned from the annual meeting at the Bank for International Settlements-BIS in Basle, Switzerland. The BIS is the premier global organization that basically runs the world's monetary system since they provide central banks with cash.
Bank for International Settlements-BIS
In last year's annual report, which was very negative, the BIS emphasized the debt load of America and American's, ranting and raving that it was not sustainable. This year in light of September 11, their report sang the praises of the "resilience of the global financial system" as a result of lower interest rates and increased consumer spending on retail, new homes and mortgage refinancing. What was a sin last year (debt) is now the savior of the whole system!
The annual report discussed the fact that because central banks kept interest rates low that it was able to continue to stimulate the housing markets with "greater access to consumer and mortgage credit." Furthermore, they wrote, "[H]ousehold spending was well sustained in most countries, despite high debt levels, declining equity prices and growing concerns about job prospects (p. 7)."
Moreover, they explained where the consumer was getting money, "As households can now borrow against unrealized capital gains [in their homes through home equity lines of credit] û without selling their houseùtangible assets have become much more liquid. The United States provided perhaps the most striking example in 2001: rapid home price inflation, allied with increased mortgage refinancing, significantly cushioned the negative effects of a declining stock market, the deterioration of the labor market and the shock to confidence following the 11 September attacks (p. 21)."
With regard to overall indebtedness, the US has the highest government debt to GDP with Europe and Japan following versus household debt to total assets where the United States has the highest amount of household debt to total assets.
As a result of the above, what this says to me is that the apparent resiliency in the global markets, i.e. in particular the U.S. economy is based on MORE DEBT which is a quick band aid to appear to "fix economic problems". WE ARE SPENDING OUR WAY OUT OF RECESSION, WHICH WILL ONLY EXACERBATE THE PROBLEM MORE SEVERELY WHEN IT COMES TO A HEAD. IN LIGHT OF THE WAR ON TERRORISM, THE U.S. HAS EVEN MORE DEBT!
The following is part of my interview with William R. White, BIS Economic Adviser and Head of Monetary and Economic Department.
Veon: In your annual reportùbecause of low interest rates there has been an energizing of the housing industry. How can this continue given liquidity and debt ratios? Is housing the next NASDAQ since housing is spurring the economy now but at some point people are going to say, "I have too much debt."
White: The concept that somehow people spend more than what is sustainable up front, is in a certain sense, borrowing from their spending in the future and of course, that is essentially what debt is. If you spend it today, you don't have it to spend tomorrow. The more you borrow like that or cash in on the value in your home will catch up. The debt ratios in the United States, in particular, are going up pretty sharply while the DEBT SERVICE BURDEN IS NOT YET SO HIGH BECAUSE THE INTEREST RATE ARE QUITE LOW.
Veon: That's the point.
White: The real worry is what will be the reaction when interest rates go back up. In a way you can see the possibilities for danger here. If the interest rates go up, then the amount required to service the debt burden becomes impossible and collides [with reality]. On the other side, the rates are not going to go up until such time that it looks like there is a sustainable recovery coming from the other side which is the corporate side. There is no question. Everything is looking rather exposed and hoping for good luck to smooth this transition. If the corporate section does not come back, the rates [will] have to do downùthere has been so much mortgage refinancing in the U.S. that there is very little left unless the rates go down again and if they do, then all kinds of people will go back in and take [more] money out of their houses (emphasis added). End of Interview
The bottom line to the BIS Annual Report that was underlined by my interview is that the "resiliency" of the U.S. economy and the global economy is due to central banks making money available and lowering interest rates. This has stimulated the economy by making mortgage money available to the system. Because 4 out of 5 jobs are related to the housing industry, our economy has appeared to stay on an even keel. It is really impossible for the Federal Reserve to raise interest rates because if they do they might "NASDAQ" the whole economy and kill the housing industry.
All you have to do is listen to the radio to hear advertisements about zero percent financing on autos and one year delayed payments on furniture!
Furthermore the BIS annual report discussed the fact that the commercial paper market dried up as a result of lower interest rates and corporations switching to long-term debt to lock up low rates. Furthermore, as a result of corporate credit rating downgrades, corporations were forced to borrow short-term in the ASSET-BACKED COMMERCIAL PAPER MARKET where receivables are used as collateral! Furthermore, banks experienced a rise in bad debt expenses that reduced the profitability in most major banking systems. In the US, bank profitability was lower than what it had been six to seven years ago.
Driving the issue of debt home is WorldCom. Filing the largest bankruptcy in history, the company is trying to keep its 60,000 employees for another year with a $2B line of credit. The company listed assets of $107B and debts of $41B with income of $30B a year. Part of their woes, besides the allegations by the SEC that they had been defrauding investors, is the fact that they "were being crushed by interest payments on its mountain of debt" (WP, 7/23/02,1).
- The pattern, which you have seen in the last 60 days, will continue
The Last 60 Days In The Stock Market
While there has been discussion that America recovered from the 2001 recession, the last 60 days have not indicated that we are in "recovery"ùanything but recovery.
There are a number of divergent trends occurring in the market. (1) While the economy is growing as indicated by the non-farm business sector soaring at an average annual rate of about 7% in the fourth quarter of 2001 and the first quarter of 2002, we have seen some of the most turbulent selling with the Dow down 7.5% for the second week in a row at a four year low, going back to October, 1998. As of 7/19, market losses are severe: the Dow down 22.5% or 2,333 points from its May high just 9 weeks ago.
Analysts on CNBC observed on Friday that this particular market drop is completely DIFFERENT from other market drops as ALL OF THE SECTORSùALL STOCK, even those with positive growth and earnings have been affected: consumer, defense, energy, housing, growth, big, medium and small caps as well as sector funds. The words used on CNBC say it all, "This is a different bear market than what we have seen before."
The very serious conclusion that I came to in the March newsletter was very simply this: If all the barriers between the nation-states are down and the last vestiges of economic sovereigntyùthe control and oversight of the Security and Exchange Commission and accounting and auditing have been shifted to players that don't have to account to Congress and which are comprised of international bankersùthe same who run the monetary system of the worldùthen they can create any kind of scenario in the market place. The shift of economic oversight opens the door wide to creating and STAGING future "Nasdaq" types of situations in which any time the market climbs 20% or more, "problems arise" where they sell high, leaving you in the "buy/hold" position with lesser value in our account. Perhaps we need to ask who makes the gain when you and I buy and hold?
The bottom line is by passing the Sarbanes Bill; it moves the last pieces of Congressional oversight over the markets. In other words, market turbulence may be the "norm" in the future. Perhaps we should ask if the "Robber Barons" of the early 20th Century have returned with a vengeance as the two laws which Congress put in place to protect you and I are in the process of both being repealed?
One Bright Spot
You hear and read very little about gold. In this market, one oz. Gold bullion coins rose 5.49% with NY Merc spot gold up $6.90. Even if you read the newspapers about where to invest, they will tell you real estate, treasury bills and bonds, without even bring gold up. Let me remind you that the countries of the world pay their dues to the International Monetary Fund and World Bank in gold and the Bank for International Settlements only deals in gold. Their annual report stated their assets include 192 tons of gold. Gold stocks are up 50-85% year-to-date. That says it all.
In order to write any of my economic newsletters, I basically compile a tremendous amount of economic information and then put the salient parts in abstract form. As I do this, I start forming a picture of where the economy is going. The key word that kept coming to my mind this time is "ROTATION". There is a complete ROTATION taking place throughout the economy. What this means is that what used to be is no longer. Something that was not is now becoming predominant and perhaps long term in nature. For example, the week of July 15, NASDAQ stocks were up three days out of five while Dow stocks were down five out of five.
Lastly, I would like to provide you with another part of my interview with Mr. White.
Veon: With regard to goldù
White: With regard to gold, there are a number of combinations to explain its rise. One is that gold prices were very low for a long period of time. The flow demand for gold is significantly higher than the flow supply, in part because flow supply is down reflecting the low prices and the cost to open up or reopen mines. Flow demand is rising and could rise sharply for structural reasons. China and India are doing very well with opening up middle classes and gold, particularly in India and in China is considered to be a symbol of status such as jewelry. I would think that as they become more liberalized that it will change the price of gold, simply because there are people whose culture tells them to buy it.
The other thing that I am told about is that a lot of companies that have been hedging their forward sales have stopped doing that. So that has taken a lot of pressure off the market. And lastly, in times that are difficult or presumption of greater difficulty, gold is something that people have gone back to. The best example is Japan since there are a lot of difficulties there. There has been a sharp increase with people going down to their banks and buying gold blocks and currencies as well. The Japanese demand for currency that you stick under your bed, it has just exploded in the last couple of years. Their interest rates are very low and a low inflation environment so the opportunity cost is very little. And then you look at gold and say, "It doesn't pay any interest." Well, so whatùno one is paying interest any more and gold is gold.
In conclusion, my only goal is the PRESERVATION of your investments. I have worked extremely hard. You were sheltered from the full brunt of this market's decline because of gold stocks and other positions. If in the future I find that it is not possible to protect in the way that I think monies need to be, you will be the first to know. I will not be using a buy/hold strategy in the future. When you have gains, you need to lock them up, otherwise someone else will.
In closing, I fell oppressed. So let me put life in perspective: "The Lord also will be a refuge for the oppressed, a refuge in times of trouble. And they that know thy name will put their trust in thee: for thou, Lord, has not forsaken them that seek thee" (Ps. 9:9-10).